Federal civilian agencies will face nearly $2 billion in spending reductions if Congress doesn’t rollback sequestration cuts for fiscal 2016 or set spending levels under Budget Control Act caps, according to an Aug. 20 Office of Management and Budget report.

Sequestration was canceled for the last two fiscal years because of a bipartisan budget deal that was struck in Dec. 2013, but the cuts are scheduled to go back into effect in fiscal 2016 unless Congress cancels them again.

If you ask government contractors to talk about what affects their business, it takes less than a minute before you hear the familiar refrains of budget cuts, sequestration, and political gridlock. Those issues may be at the top of everyone’s minds now, but for those who do business with the government, a long-term vision is essential for surviving Washington’s ongoing crises.

Capital Business asked local executives to take a step back and name one issue that will be a game-changer for contracting over the next decade.

From the threat of terrorism to the inexperience of a younger government workforce, here’s what they said:

The sequester, the winding down of the wars in Iraq and Afghanistan, and overall budget cuts produced an 11 percent decline in federal contract spending in fiscal 2013, according to the third annual Bloomberg federal industry leaders study released on Tuesday.

The companies leading Bloomberg’s list of the top 200 contractors remained defense firms, with their rankings unchanged from the previous study. The five companies that did the most business with the government in fiscal 2013 were: Lockheed Martin Corp., with $44.3 billion in contracts; Boeing Co., with $21.6 billion; General Dynamics Corp., with $14 billion; Raytheon Co., with $13.7 billion; and Northrop Grumman Corp., with $10.8 billion.

“All three companies in the top 10 that increased their contract totals — Lockheed Martin, Huntington Ingalls and McKesson Corp. (No. 10) — benefited because they worked on politically protected programs,” the analysts wrote. Those programs were the F-35 Joint Strike Fighter for Lockheed Martin, a “number of warships for Huntington Ingalls and pharmaceuticals for the Veterans Administration for McKesson.”

Overall funding for the Defense Department’s science and technology budget undergo about a $500 million reduction in the president’s fiscal 2015 budget proposal, with grants and missile defense bearing the brunt of the cut, says a DoD official.

About $200 million of the proposed budget reduction would come from cuts to grant programs nationwide, which equates to about 1,500 grants, said Alan Shaffer, acting assistant secretary of defense for research and engineering.

The department also took about $150 million out of its Missile Defense Agency Science and Technology program, said Shaffer during an April 8 hearing of the Senate Armed Services subcommittee on emerging threats and capabilities. The decision made sense because much of the technology has matured to a level where it could be moved to other parts of the department, he added.

While the federal contracting industry is by no means recovered, the future looks a good deal brighter than it did just a few months ago.

The two-year budget agreement has partially mitigated the impact of sequestration and greatly reduced the risk of a government shutdown. The agreement brought some stability and predictability to a market that has been starved of both for several years.

Each year, Deltek conducts a Clarity study assessing critical business metrics in the government contracting industry, such as growth rates and profit margins, plus operating metrics and trends, in areas such as business development, program management and financial operations.

The early results reflect the improved outlook resulting from the budget resolution. Yet, as one would expect, certain financial metrics — such as profits, mergers and acquisitions and win rates — reflect the difficult year that was 2013.

Budgets cuts, contracting reforms and the military drawdown in Afghanistan have pushed government contract spending to its lowest level in more than seven years.

Government spending on contracts plunged almost $58 billion – 11 percent – to about $460 billion in fiscal 2013, according to the Office of Management and Budget and preliminary estimates from the Government Accountability Office.

Spending has fallen three of the past four years, from a peak of $550 billion in fiscal 2009 — and administration officials say more declines lie ahead.

“For fiscal 2014, we expect agencies to continue these smarter buying practices to deliver even more value to the taxpayers,” said Office of Management and Budget spokesman Frank Benenati.

Rob Burton, former deputy administrator of the Office of Federal Procurement Policy at OMB and a government contracts attorney at Venable, said the steep drop in procurement spending is the result of numerous factors and policies.

Sequestration, the continued drawdown of military operations in Afghanistan, along with OMB policies to encourage spending cuts such as strategic sourcing, all played a role, he said.

[Note: This article was written by Terry Verigan, vice president of CompuCure.]

Hurricane Katrina nearly killed CompuCure. In the wake of the storm, just three of us remained by Oct. 1, 2005, and the weeks ahead promised to be grim for our New Orleans-based IT services firm — what was left of it anyway. But we weren’t going to let that damn storm chase us away from our city.

By September 2013, eight long years after Katrina wiped out so many lives and businesses, CompuCure had rebounded sufficiently to make Inc. Magazine’s list of the fastest growing businesses in America. With a talented staff of 30 delivering projects that had achieved national recognition for quality and value, it was tempting to think we’d made it to some sort of safe high ground, economically speaking. But by late September, our president and owner, Angelina Parker, faced another storm, this one political. The federal shutdown nearly took down the business again.

While we had become accustomed to the disruptions that stemmed from continuing resolutions — the stop-gap budgets lawmakers typically adopted while they continued to disagree over larger spending questions — those rarely impacted our work at federal sites. Employees would clock in while budgets were frozen and eventually CompuCure would be reimbursed. Our line of credit was more than sufficient to carry on. Interest charges eat away at profitability, but we could keep going, knowing that our people and their families felt secure. Our most valuable resources, our employees, would still be on the job.

But the shutdown was different. It meant lost revenue to CompuCure, not just a delay in getting invoices paid. Disturbing questions emerged, notably: How would we keep our talented employees from moving to other companies less dependent on federal contracts?

Sequestration forced revenue losses among almost two-thirds of contractors in 2013, according to a survey by two consulting firms released last week.

Almost 31 percent of the 220 firms that responded to the survey by Market Connections Inc. and Lohfeld Consulting Group Inc. said their revenue fell by more than 10 percent, while another 30 percent reported declines of nearly 10 percent.

In response to government market pressures, contractors are re-architecting by expanding into adjacent markets (45 percent), modifying lines of business (35 percent), and putting greater emphasis on the front-end of the life-cycle to improve capture strategies an

More contractors are pursuing new opportunities in state and local government, international markets, and energy in 2013 than in 2012. Pursuit of healthcare opportunities is still high on the list of new and adjacent markets contractors are pursuing:

State and local government: 48 percent in 2013 vs. 29 percent in 2012

Healthcare: 39 percent in 2013 vs. 38 percent in 2012

International markets: 36 percent in 2013 vs. 29 percent in 2012

Energy: 33 percent in 2013 vs. 20 percent in 2012

“It is clear that sequestration and the government shutdown have had a tremendous impact on the government contracting community,” said Lisa Dezzutti, president and CEO of Market Connections, Inc. “Contractors need to think outside the box, leverage their expertise in adjacent markets and focus on business development and capture strategies that will increase win rates.”

Contractors are making the following investments in the front-end of the lifecycle to enhance the business development and capture process and increase win probability:

Improving capture and proposal processes: 40 percent

Adding more business development/capture personnel: 39 percent

Enhancing capture and proposal tools and infrastructure: 28 percent

Increasing use of consulting services: 19 percent

Adding more technical personnel to support business acquisition: 15 percent

The Office of the Secretary of Defensewill get smaller over the next five years as Chuck Hagel plans to cut 200 positions from his office, saving the Pentagon about $1 billion.

In July, Hagel ordered a 20 percent reduction in the front office budget to comply with sequestration reductions. The Joint Chiefs of Staff, service chiefs, combatant commanders and 3-star headquarters will reduce their staffs, as well.

“Some of these savings will be achieved through significant reductions civilian personnel; much of these savings will be achieved through contractor reductions. We are still finalizing the details, which will be available when the budget is submitted next year. But we will save at least $1 billion over the next five years,” Hagel said during a press briefing at the Pentagon on Wednesday.

In addition to eliminating 200 positions, several departments will reorganize to “reshape and strengthen” their staff. The Office of the Undersecretary of Defense for Policy will “re-balance” some of its workload to assistant secretaries of defense. The Office of the Assistant to the Secretary of Defense for Intelligence Oversight and the Defense Privacy and Civil Liberties Offices will be combined into a single office, as well.